Is Keynesianism dead?

posted at 11:15 am on December 4, 2010 by Ed Morrissey

Investors Business Daily titles its editorial today, “Keynesianism, RIP,” declaring the government-spending stimulus philosophy discredited in the wake of the 19th consecutive month of 9% or higher unemployment rates. IBD wants Barack Obama to put aside his “stubborn pride” (and his economic team) and start working with Republicans on policies that will truly stimulate the economy. But is the death certificate for Keynesianism premature?

Please, Mr. President, you and your economic team of born-again Keynesian central planners have had your chance.

Remember having to fire Christina Romer, among others, for forecasting your $800 billion stimulus bill would keep the jobless rate below 8%? Now, private economists are forecasting a 10% rate for next year. For the first time, the U.S. is facing Euro-style structural unemployment. This is no time to be raising taxes.

Yet, in a sign that ideology still trumps reality, Romer’s replacement carries on the discredited tax-and-spend torch. …

An unrepentant Obama insists the lopsided election was a referendum on the economy and not a repudiation of his policies. He says voters were “not thinking clearly” when they voted for change.

Who’s not thinking clearly, Mr. President?

It’s worth noting that John Maynard Keynes gets a little bit of a bad rap in this debate. Keynes never argued that debt didn’t matter, which is the argument at the heart of what we’re calling Keynesianism. Keynes argued for spikes in government spending during recessions, but funding those through the collection of surpluses during boom years. Instead of spending out of accumulated but moribund American wealth, we’re spending Chinese wealth — with interest. That isn’t what Keynes had in mind.

I’m also reminded of what professed Communists said at the end of the Soviet era. Communists claimed that the Communist bloc collapsed in 1989-1990 because they just didn’t do Communism well enough, or purely enough. We’re hearing much the same argument from modern-day Keynesians, who claim that Obama didn’t spend enough borrowed money, even though there were few voices in early 2009 advocating for spending on a multi-trillion dollar scale. The failure was one of courage, not Keynesianism, and all we need to do is borrow perhaps as much as a full year’s federal budget in addition to the normal spending, and have government spend that, too.

Those arguments fail on the evidence. Not only did the Porkulus package fail to stop unemployment from rising above 8% as predicted by Obama’s economic team, it also failed to sustain growth beyond its own stimulation. It’s Cash for Clunkers writ large, an attempt to fool people into believing that the economy is showing real organic growth rather than the obvious short-term effects of government spending. It should be called Peter Panism, or Tinkerbellism, especially when its advocates insist that the only way to keep it alive is by clapping your hands.

But that doesn’t mean Keynesianism is dead. It may be momentarily discredited, but it has a powerful attraction to politicians. Modern-day Keynesianism allows them to look busy during a crisis and act as though they’re, well, acting. It also allows politicians to get their hands on a lot of cash — and that allows them to share the spoils with key backers and constituents. It’s practically built for pork. Perhaps even more seductively, it gives politicians the illusion of control over the economy, allowing them to pick winners and losers. Unfortunately, that is just an illusion; as Hayek explains in The Road to Serfdom, the economy is too complicated for central controllers to operate it, and those attempts to do so result in economic ruin.

That was the reason Communism failed, and it’s the reason modern-day Keynesianism fails as well. Putting the resources in the hands of bureaucrats rather than the market stakeholders makes markets less efficient, distorts incentives and outcomes, and inevitably leads to economic failure. If we learn that much this time, perhaps we can at least put modern-day Keynesianism into a coma for another few decades.

Instead of spending out of accumulated but moribund American wealth, we’re spending Chinese wealth — with interest. That isn’t what Keynes had in mind.

Your point goes to the heart of our problem. Unlike China and Germany, which ran surpluses during the economic boom, the United States ran huge deficits during the good times.

Those arguments fail on the evidence. Not only did the Porkulus package fail to stop unemployment from rising above 8% as predicted by Obama’s economic team, it also failed to sustain growth beyond its own stimulation.

This is probably a little too dramatic. First, was the stimulus effectively allocated? By your own choice of terms, can a ‘porkulus’ package that’s overly back-loaded ever deliver the level of stimulus needed? Second, you seem to be making the same kind of sweeping indictment often leveled by those pushing for supply side policies- based on single use cases and scant empirical evidence. Did the Chinese ‘Keynsian’ stimulus of 2007 also fail? And has demand-side stimulus consistently failed over the past 30 or 40 years that modern economies have engaged in these policies during recessions?

The failure of stimulus to deliver incredible, turn-around results in the US, unlike China, speaks largely to the failure of Larry Summers and others to appreciate the full magnitude of the Great Recession. Clearly this country is experiencing a mini-depression, or what might have been a full depression if not for government action to prevent the financial system from total collapse. A v-shaped rebound of the economy was never in the cards and, as a result, expectations were never close to realistic. Given the massive capital destruction that occurred in 2007 and depressed spending as households and businesses grappling with lower asset values and high debt, Americans expected too much, too soon.

As many Wall Street economists have noted, you can’t ‘stimulate’ business growth during a balance sheet recessions by simply incentivizing businesses. Corporations are already sitting on mountains of cash but simply have no reason to invest in new capital equipment or in building up inventories when there’s no sign that consumers will buy their products. So there’s no clear set of policies for luring corporations to bring back days of growth.

In fact, no one has a real answer for ending a once in a century economic event. By looking at Japan’s similar balance sheet recession of the past decade and major economic upheavals in advanced Asian economies over the past 20 years, you can draw some broad conclusions of how government policy can help turn things around. But at the end of the day, any politician who claims to have all the answers is simply lying.

once in a century event? Recessions are cyclical…they seem to occur every 6-8 years. Some of them last forever because of policy. That’s why Japan is so instructive, they followed FDR’s model without the built-in FDR bias that blinds most observers. Better yet, look to the recessions that have successfully been dealt with in under 2 years.

But at the end of the day, any politician who claims to have all the answers is simply lying.

Indeed, that is why they have to loosen the reins and let the invisible hand do its thing.

Nah its not dead until shills for it like Krugman and Rich are gone the way of the world. Still way too many tools who follow along with the “Oh he won a Nobel in Economics! He must be some kind of genius whiz!”

Is it dead? Only if we never elect a big government type president again. Trouble is, we as citizens have gotten used to all the “free stuff” promised us and are more than willing to re-elect people who tell us what we now know are lies.

Why? Stupid. Weak. Greedy. It was the warning given us centuries ago by the designers of the nation.

I can explain what happened to the economy. The economy has been destroyed over decades by the Democrats and Republicans pursuing and defending their sacred cows. The Democrats worked here at home through environmental, and job regulation to make the environment as unfriendly to business as possible, and the republicans in their pursuit of free trade ensured that the path to off shore production always remained open.

and free trade as an ideal is to republicans what communism is to progressives. It fails for the very same reason. Communism and free trade both depend on the inherent goodness of humans. You cannot have free trade because governments cheat.

Communism and free trade both depend on the inherent goodness of humans. You cannot have free trade because governments cheat.
DFCtomm on December 4, 2010 at 5:05 PM

If that’s what you think, you clearly do not understand free trade. Free trade depends on the pursuit of self interest through a series of contracts freely pursued and agreed upon by both parties. Being good or nice has nothing to do with it.

If that’s what you think, you clearly do not understand free trade. Free trade depends on the pursuit of self interest through a series of contracts freely pursued and agreed upon by both parties. Being good or nice has nothing to do with it.

Keynesianism never lived in any dimension other than an ideology. Obviously, the ideology is still being refined today – but as much as I disagree with several and most of Keynes’ points, I don’t think his original theory is being put to the test or completely put to work. I think parts of his anti-classical theory are feebly being put into place, but you cannot take this current cherry-picked patchwork of Marxist ideals and legitimately call them the works of Keynes.

The problem with the liberal progressives in this country and their class warfare mentality is that when the economy is good, they want to tax and spend, and when the economy is bad, they want to tax, spend, and borrow.

In the late nineties we were told that because of the heavy government regulation, we would have shorter, more frequent, but less deep recessions.

Now, we have the Obama Depression, and government meddling is at an all-time high and we are told all we need is more government and it will never happen again.

Corporations are already sitting on mountains of cash but simply have no reason to invest in new capital equipment or in building up inventories when there’s no sign that consumers will buy their products. So there’s no clear set of policies for luring corporations to bring back days of growth.

That’s not why

it’s because they know full well if they make their cash vulnerable by investing there is no telling what laws that will be passed to pillage it

so they and simple people keep it safe, or so they thought until the Feds indirectly grab it by devaluing it by adding another 600 billion

Whenever such a synopsis appears, I recall “Schoenberg Is Dead,” written long after his death by Boulez, who noted amongst the international musical elitists that Arnold Schoenberg’s serialism ultimately proved to be a dead end in musical compositional technique, certainly not at all what Schoenberg had promised his “atonality” to provide, his own new world order, aka New Viennese School. And it only took the majority of the 20th Century to prove that serialism theory’s ultimate dead end, after being trumped and worshiped as the second coming of compositional basis since burying tonality between WWI and WWII.

Keynesianism, RIP

Point being, the growing American acknowledgment that the sooner it is taken out, the sooner we quit digging our insurmountable hole of our national grave, with us buried in it, dead or alive. The ultimate dead-end of Keynesianism.

But that doesn’t mean Keynesianism is dead. It may be momentarily discredited, but it has a powerful attraction to politicians. … It’s practically built for pork.

Ah yes, the religion of transubstantiation comprises politicians clinging bitterly to their Keynesian dogmas that have utterly no empirical basis for substantiation.

What all Keynes taught v. what politicians have fabricated on his behalf? The same critical analysis transposes to any pedagogue or prophet with disciples carrying out the “word” on the teacher’s behalf and for your own good.

and free trade as an ideal is to republicans what communism is to progressives. It fails for the very same reason. Communism and free trade both depend on the inherent goodness of humans. You cannot have free trade because governments cheat.

DFCtomm on December 4, 2010 at 5:05 PM

Sounds as if you’re dictating what we may and may not have, offering anarchy?

Voters wanted the Democrats to address the economy, not pay off their union allies through bailouts and try to nationalize the health care industry. And most voters do not share President Obama’s insouciant (and economically ignorant) conviction that wasteful government spending is just fine, since “spending equals stimulus.”

Hence the midterm election blowout. Now the Democrats face the sobering reality that their policies have completely failed to solve the economic problems that they were elected to address. On the contrary, matters have gotten worse on their watch. Today’s bad news–“unexpected” as always, as Glenn Reynolds likes to point out–demonstrates that the administration and its Congressional allies are still at square one when it comes to stimulating economic growth. The French news agency, AFP, can’t hide its schadenfreude at today’s jobs report: “US unemployment surges to 9.8 percent in November.”

It doesn’t matter what economic system you employ as long as you have politicians without term limits. House members should be allowed six two year terms for a total of twelve, and Senators should be allowed two six year terms, for a total of twelve. Any longer than that is an invitation for corruption no matter which party is in control. Most policies in this country are based on reelecting parasitical lawyers. We are paying the cost for allowing a political class rather than having true citizen representatives performing a civic duty….

The invisible hand has been beaten with a Keynesian hammer for a long time. I remember a couple of years ago when Madame Zsa Zsa over at Huff-n-Puff Post saying this crash was the result of unregulated Capitalism. I wanted to tell her she was an idiot, as there hasn’t been unregulated Capitalism since the mid nineteenth century.

This election should be run by the Republicans as either for Capitalism and it’s inherent economic freedoms or for Socialism and it’s inevitable implosion which we have just experienced. You can’t take from Peter to give to Paul and make it work. Keynes in more than all likelihood never owned a business, hired employees, or wrote a paycheck and met an employees Social Security Tax. All liberal idiots are like that. We have that kind of Commie in the White House. How’s that “Trickle Up” economics going, Obamalinsky?

If you simplify economics by equating it to your personal financial situation, this should open anyones eyes, well, excluding liberals of course.

If I want something I can afford, I buy it which stimulates the economy. If I want someting and don’t have the money, I wait until I do which slows the economy. If I do spend using credit, I get interest payents that erodes my spending and creates more debt which leaves two options: stop spending and pay down debt. You don’t spend more you don’t have to get out of debt.

Evil, ignorance and stupidity never really die. The fight against them is neverending.

trigon on December 5, 2010 at 11:44 AM

Haha. As evidenced by Teabaggers’ continued belief that voodoo/trickle-down/Larry The Cable Guy/neo-dumbed-down-Friedmanist economics will lift us out of the Depression that they CAUSED — yep, I think it’s safe to say you’re right.

Sounds as if you’re dictating what we may and may not have, offering anarchy?

maverick muse on December 5, 2010 at 5:39 AM

No I’m not offering anarchy. My point is that international free trade as a concept is as bogus as communism, and fails for the same reason. VAT disparities, currency manipulation and a million other little roadblocks to our exports prove this. Like communism it looks good on paper, but in the real world fails miserably.

Evil, ignorance and stupidity never really die. The fight against them is neverending.

trigon on December 5, 2010 at 11:44 AM

Haha. As evidenced by Teabaggers’ continued belief that voodoo/trickle-down/Larry The Cable Guy/neo-dumbed-down-Friedmanist economics will lift us out of the Depression that they CAUSED — yep, I think it’s safe to say you’re right.

No I’m not offering anarchy. My point is that international free trade as a concept is as bogus as communism, and fails for the same reason. VAT disparities, currency manipulation and a million other little roadblocks to our exports prove this. Like communism it looks good on paper, but in the real world fails miserably.

DFCtomm on December 5, 2010 at 12:09 PM

But don’t stop at denial of the inevitable conclusion, since it is anarchy that results from the premise you observe. No?

Too many people observe what fails, but stop short of admitting the finality of failures, afraid of being typecast a “radical” by those who deny the inconvenient truth of the obvious, and fearful of ridicule from Alinsky-practicing “ruling” progressives feigning conservatism in the Republican Party.

Zombie Paulson and Bernanke? Nah, they’ve got theirs regardless, at the bottom of the power structured globalist authoritarian elitist totem pole. The zombies are the gullible and greedy takers of fraud, like fish to a lure, whether taking tax funded subsidies, pork, or the 50% population not paying taxes while feeding from tax funded socialist programs.

Authoritarianism is the cancer killing US Constitutional Governance. Cut it out and irradiate the sources.

So, with THE ONE as our, ahem, leader, and an economic smartpants to boot, just ask him. He should have spent 500 trillion dollars in deficit spending to stimulate the economy. Why, we’d have a negative unemployment number, with everyone hired two or three times each, with record taxes and personal income. Yea Obowmanomics….

Or cut spending, cut taxes, cut federal regulations that have stopped the economy resulting in record tax income, record personal inocome and personal wealth….aka “THE EIGHT YEARS OF BUSH’S FAILED ECONOMIC POLICIES”….